The UK’s latest jobless figures have hit a 17-year high (of 2.57mn). Unless the economy starts to recover more strongly, these kinds of figures will not change. But the latest Ernst & Young Item Club Report warns that Britain’s economic recovery has now stalled with key economic drivers ‘stuck in neutral’. Using the UK Treasury model, the Item Club forecast economic growth of only 0.9% this year – down from its projection of 1.5 % only three months ago.
This grim scenario is reinforced in a report by the business information firm Equifax. They show that between July and September, UK business failures increased by 20% compared with the same period last year – 120 UK firms are now going bust each day!
Many experts continue to blame the banks for a lack of support (like not lending enough and high bank charges) to small businesses in the UK, but there are many other issues. The Federation of Small Businesses, for example, has called (October 17) on the Government to introduce tax cuts for the small business sector. The Director-General (John Cridland) of the UK CBI has called on the Government to be ‘Churchillian’ in its efforts to bolster corporate confidence.
The biggest single threat at the present time to UK and global economic recovery, however, is the continuing eurozone crisis and its implications for global sovereign (country) debt and market confidence. Failure to resolve this crisis quickly (it has been a ‘crisis’ now for well over two years) and decisively could lead to a ‘nightmare scenario’. Not only does it help foster increased market uncertainty and adverse speculation, it also operates to put a further brake on bank lending.
Tackling the eurozone crisis is synonymous with reducing the probability of systemic (or system-wide) risk arising from a sovereign debt default (so-called ‘sovereign risk’). So long as there is a significant and apparently growing chance of such a risk happening (which the present eurozone crisis helps to foster in the minds of market participants), banks will be under growing pressure to re-capitalise. High required levels of bank capital (needed to absorb these kinds of infrequent but high monetary value losses) can put a further brake on bank lending since banks have to grow lending in line with the available capital that they hold in their own balance sheets. Already being criticised for a lack of lending support to businesses, the banks under this scenario may then face a ‘double whammy’ as bank regulators constrain them further.
Spain’s credit rating was downgraded on October 14, which has added to the pressures to solve the eurozone crisis. Standard & Poor’s dropped Spain’s long-term credit rating one notch to AA- (from AA). There could be a further downgrading if their outlook for Spain remains ‘negative’.
Recent analysis by The Sunday Times (16 October) gives more insight into the apparent impact of this summer’s euro crisis. Large daily fluctuations in the FTSE 100 index have been five times more frequent in the three months from July 2011. But although these figures are certainly huge and of concern, they are still nowhere near the volatilities experienced during the 1987 stockmarket crash.
Stock market volatility also rose after the collapse of Lehman Brothers in 2008, but daily movements moderated soon afterwards. As we have seen, though, growing worries about the eurozonecrisis have apparently increased volatility from July of this year. The market is concerned that failure to resolve the crisis could be the harbinger of a new systemic financial crisis centred on sovereign debt and the banking system.
Eurozone problems dominate the headlines as the global economic scenario continues to attract increasing concern. ‘Doom and gloom’ scenarios abound. The riots on the streets of Greece this week (19 and 20 October) in protest at the latest austerity package needed to secure further Greek financial support are a stark reminder of the wider social dimensions to the crisis.
As the G2O finance ministers meet this week (October 17) in Paris in advance of a European summit this weekend (22 October), the stakes in resolving the eurozone crisis are pretty much as high as they can get. There is a growing and pressing view that this crisis has to be solved once and for all; time is fast running out. The immediate objective to this end is to have an agreed plan ready for the Cannes G20 summit in early November.
Despite the fact that key eurozone countries (especially France and Germany) have agreed recently to develop such a plan, there are still some big hurdles to climb to achieve this. Angela Merkel, the German Chancellor, for example, has cautioned against expectations of a quick resolution of the eurozone crisis. She seems to believe that talks on resolving the crisis could go on well into next year.
There are many other practical complexities in the present efforts to resolve the crisis. On October 13, for example, France pressed for a huge expansion in Europe’s bailout fund and the debate around this could re-open differences with Germany on how best to handle the crisis.The FinancialTimes (October 15 and 16) also reported another problem – private holders of Greek debt are not willing to accept losses on their bonds greater than the 21 % agreed in July 2011. Germany, on the other hand, is determined that these bond holders should bear losses at least up to 50 %. On a wider front, the US and UK recently rejected proposals (from emerging market countries) that the IMF needs more powers to help tackle the eurozone crisis.
Other recent developments are also a reminder of the wider global impact of the eurozone crisis. China, for example, has apparently made a secret commitment to help support the eurozone. Such a move would require in exchange major budget reforms and sweeping public sector cuts in the eurozone. China has indicated a willingness to inject ‘many tens of billions’ of funding into the eurozone via the purchase of infrastructure assets from debt-burdened countries. This has to be good news.
At the same time one might also note the apparent reduction in market confidence about China’s own growth prospects (reported in The Financial Times, October 15 and 16). Emerging markets began to underperform against prior expectations towards the end of last year (2010). The Financial Times argues that China now needs more transparency (more publicly available information and clarity) for analysts and markets to develop clearer insights into economic trends and prospects. The alternative (opacity in information disclosure) is a breeding ground for fear and rumours to germinate. One mitigating factor in the present eurozone crisis is that the main problems are at least ‘out in the open’, which helps to moderate rumours and speculation.
The preceding select points not only emphasise the practical importance of resolving the eurozone crisis, but also the real challenges that have to be met in getting there. So the forthcoming G20 Cannes summit and the present eurozone talks this weekend are vital for UK and global economic recovery. A decisive and sustainable plan agreed by allthe main parties is badly needed.
It is time to stop the ‘euro coaster’, the spiralling eurozone crisis, before it falls off the tracks and drags the global economy down with it. Market confidence has to be restored. Economic fundamentals and economic policies can then address more effectively the needed ‘demand boost’ to help fire up the global economy. Economic policies aimed at doing this cannot have the needed ‘traction’ until the eurozone crisis is resolved.
Resolving the eurozone crisis, then is a necessary and pressing step needed towards starting to fire up global economic recovery. But the required political decisions in the eurozone also require US and other important countries’ politicians to emulate this positivism. Many would argue that the present global economic problems are as much a political crisis as they are economic. This is surely not a time for party politics…
Professor Bullion
